Are the Aussies coming? World’s first listed law firm eyes up UK market

Australia: Slater & Gordon has seen income and profit growth since listing

Australian law firm Slater & Gordon (S&G) – the first in the world to go public – is keeping a close eye on developments in England and Wales and would consider entering the market, its managing director has revealed.

Andrew Grech said that while he has no immediate short-term plans to move into the UK, “if the right opportunity arose, we would consider it – it would careless of us not to”.

Quoted in a report on alternative business structures (ABSs) released last week by accountants Baker Tilly (see also survey here), Mr Grech continued: “It’s certainly a very interesting market, and in the long term, we will look offshore for growth opportunities further.”

S&G floated in 2007 and has seen around 25% compound growth in both revenue and profits in the three years since. Mr Grech expanded on the experience of going public at a Baker Tilly seminar last week to mark publication of the report, called Climate Change. He explained how it had been a seven-year process of analysis and planning focused on growth and introducing a new ownership model and reward structure.

Drivers included the firm being too reliant on personal injury (historically S&G was a trade union firm) and on its traditional geographic base in Victoria, while the personal injury market was a very fragmented one.

He said they had discounted procuring additional funding from existing and/or new internal owners – there would be financial constraints on the ability of new internal owners to fund the required growth, while it increased the risk for individuals. Similarly using existing cash flows would constrain the firm’s capacity to take advantage of opportunities. Raising the firm’s debt facility also multiplied the risk for the owners. “It is dangerous given the propensity for banks to pull the rug from under your feet,” he observed.

That left private equity and listing. S&G had initially “danced” with private equity, feeling the firm too small for an initial public offering (IPO). “The private equity people had a lot to contribute, in particular their understanding of ownership plans and using equity as a currency for retaining staff,” Mr Grech said. The rigorous due diligence process they put the firm through was also a useful model for when S&G later acquired firms.

Ultimately, however, they knew that a private equity investor’s exit would be an IPO anyway – “it wasn’t going to be a trade sale” – and so went straight to a listing instead. Mr Grech listed six advantages of IPO over private equity:

It provides a higher valuation;

It created a “more achievable catalyst for succession planning” through the creation of an employee ownership plan (in which around 10% of senior staff participate), whereas private equity would dilute ownership;

It gave shareholders the ability to crystallise their investment (“but it was not about taking money out and retiring”), and provided a mechanism to manage a shift in the ownership interests of key people over the long term;

It enhanced the ability to offer shares as consideration for mergers; and

It created viable alternative exit mechanisms for principals of merged firms.

There were also several potential disadvantages, but they have “all proven manageable”: the impact on recruitment and retention (for those fee-earners with partnership aspirations), potential loss of control, a loss of privacy, compliance costs and reporting requirements, and ongoing media and broker scrutiny.

Mr Grech offered tips about dealing with institutional investors. They need to know how you would use the capital – for S&G it was about consolidation, growth and diversification – “the capacity of the management to execute the strategy” and that they are investing in a brand, which makes it “easier to digest the investment opportunity”. The nature of the firm’s work, with a large number of personal injury clients, means that “the value is in the brand” – S&G receives around 50-60,000 calls a year on its consumer helpline. “No client owns us, no staff member owns us. We won’t be held over a barrel by a rockstar lawyer.”

He added: “Institutional investors will reward you if you do what you say you’re doing to do, and kick you down the stairs if you don’t.” Mr Grech said he had also underestimated the amount of time he would spend with his investors. There are around 30 institutional investors in S&G and “when they ring, you pick up the phone”.

Mr Grech said that while there were some things that he would do differently – their approach had made the stock illiquid by locking up 45% of shares in internal owners – “there’s no doubt it’s allowed us to execute our strategy and look forward with a great deal of confidence”.

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Back in the day, when I entered the legal profession, an age of the Telex and elephantine batteries operating mobile phones, most articled clerks, as they then were, eyed achieving equity status. That was expected.